Ecommerce Infrastructure in India

Posted in Marketing & Strategy Articles, Total Reads: 3049
, Published on 02 June 2013

Advertisements

Ecommerce encompasses all business transactions occurred over the web. It can range from financial services, travel,, entertainment to groceries etc. The Business to consumer segment for online shopping and ticketing has gained everybody’s attention in the last 4-5 years and thus remains the fastest growing segment.

“Ecommerce in India is growing quickly” was a key takeaway according to a report published by Forrester Research for ASSOCHAM’s 2nd National Conference on ecommerce 2012. Though India’s ecommerce market is smaller than some other Asian markets, as forecasted by Forrester, it is still growing at the fastest pace and is expected to grow at 57% CAGR by 2012-16 and will be valued at around $US34 bn. 2011-12 was a milestone with investments coming from overseas markets into Indian ecommerce arena. However India lags in terms of IT, Financial, logistics & supply chain, Investment policy issues.

Following are the key considerations to address the ecommerce Infrastructure issues.

1) Logistics & Supply Chain – As per Avnish Bajaj Head of Matrix Partners, a VC firm, in India stocking inventory for 60-90 days requires a working capital of $40-50 mn of the target revenue is $200mn. Moreover it still takes around 3-7 days on an average to source the product and deliver it. A welcoming change in infrastructure is also seen as several online retailers such as Myntra.com are investing heavily into warehouses and logistics to improve their revenue from non-metropolitan India, which has already crossed 50% mark. Most of the e-retailers still depend upon highly fragmented courier market that only adds to delay. Investments must go into their “own” or “self” delivery system as there is not a single ecommerce solutions provider that provides end-to-end outsourcing solutions. This Infrastructure, if developed fully, will also be a source of revenue from smaller ecommerce players.

2) IT Infrastructure – ecommerce needs Internet. India’s internet penetration level is around 11.4% as per a report released by IMAI in 2012. There would be 175 mn people connected to internet by 2015 as per the report which would be around 14.22%. This still is a small number. US and China today have 77.86% and 40.01% penetration rate. Thus the Broadband Infrastructure needs a huge push. It is still expensive to browse the net in India and thus people from tier-2 and tier-3 cities find it difficult to get the Broadband.

The infrastructure in terms of payment gateways also demands attention, as the failure rates of payment gateways are as high as 35%. Firms such as Symantec are now partnering with e-retailers to provide them with better secured payment solutions, but it is still at nascent stage. The payment systems are still very costly as online payment gateways cost almost 4% to the ecommerce players.

3) Financial Infrastructure – The whole Financial Infrastructure remains a huge problem. It includes the funding for the budding and established e-commerce players along with banking services for masses. According to RBI only 2% of population has Credit card and only 13% has debit card. Most of the tier-2 and tier-3 cities are still “unbanked”. Therefore COD or cash on Demand remains the only option to gain access to this budding market. According to our conversation with Mr. Santhosh Jose, CEO , Intentree ecommerce testing Services, getting this cash from their channel partners has now come up as a new area of concern as there are disputes.

In 2011 alone, around $US 177mn were invested into Indian ecommerce by various venture capitalists. Out of nearly 400 e-commerce players in India, only about 12% have received VC funding to the tune of USD 700 mn by 52 VCs in the last 3 years. This is a positive sign, but other players have to depend upon Bank loans that have high interest rates or in many cases Banks are reluctant to invest on account of untested business models.

4) Other reasons – The state specific Octroi, VAT and entry tax further reduce profits. The foreign players are still not allowed to invest in B2C corner whereas in B2B arena, 100% FDI is allowed for them. The web optimization services is at a very rudimentary stage and clear cut goals/strategy is missing due to technical and knowledge constraints.

Conclusion -

Thus we can conclude that one needs to invest heavily in ecommerce as there is definitely a potential in India considering rising disposable incomes, increasing internet penetration etc. The combination of underdeveloped towns, lack of wholly developed ecommerce system and requirement of multiple shipping partners causes delays and increases the costs. Probably that’s why the Indian ecommerce giants are yet to see positive EBIDTA. Moreover there is not a single company in India that offers full fledged ecommerce service/solutions to which one can outsource. That says it all. What India needs today is some heavy investment not only in the areas directly linked with Indian ecommerce but also some basic necessities such as banking solutions, internet/broadband connectivity and efficient back-end infrastructure.

Article has been authored by Tarun Shukla and Lakkshay Busii of Symbiosis Institute of Management Studies, Pune